Repeated Interactions Under Costly Enforcement.∗
نویسنده
چکیده
We study repeated irreversible investment. We assume that ex ante ownership rights are incomplete and ex post property allocation is endogenous. In a stage game, principal can renege on ex ante contract with agents (investors). To capture that ownership rights depend on prior arrangements, we introduce a dynamic game, in which player ex ante ownership shares are equal to their ex post shares in the stage game of the previous period. With the commitment constrained principal, equilibrium of the dynamic game features cyclical changes in investment. These cycles indicate that contractual incompleteness alone causes output fluctuations. Thus, when costly contracts result in constrained commitment, persistent cycles in output occur, resembling business cycles.
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